CUNA Chief Economist Puts Odds Against Recession

CUNA Chief Economist Mike Schenk said Tuesday that the odds are against a recession by the end of 2023.

He said the chances of a recession were 30% to 40% based on his confidence in the continuing strength in consumer demand and a decent chance the Fed can navigate a “safe landing” by raising rates enough to cool inflation, but not enough to bump the economy into a downturn.

“There is considerable risk to the downside here,” he said. “The historical record of Fed attempts to tame inflation without causing a recession is not reassuring.”

This also assumes the COVID-19 pandemic will morph into an endemic, with a diminished impact on economic activity, and that the war in Ukraine will not spread beyond Ukraine’s borders.

Schenk provided more detail in an “Economic Update” video he recorded May 20.

The video included two changes to CUNA’s April 12 forecast for the first quarter.

First, the video showed the gross domestic product in the first quarter falling 1.4% from a year earlier, instead of the April 12 forecast of 1.5% growth. It still showed GDP rising 3% this year and 2% in 2023.

Second, the annual inflation rate forecast for April 12 as 10.7% for the first quarter was reduced to 8.5% in the May 20 video.

Mike Schenk

The GDP revision was based on the U.S. Bureau of Economic Analysis advance estimate released on April 28. A second estimate, released May 26, had GDP falling 1.5%. It followed a 6.9% increase in real GDP in the fourth quarter.

Two consecutive quarterly drops in GDP are typically considered to define the start of a recession.

In his May 20 video, Schenk said the drop in the first quarter isn’t a harbinger of recession.

“I believe economic growth in the second quarter will bounce back and will be positive,” Schenk said.

Factors contributing to the first quarter drop included a spike in consumer spending on imported goods, which by definition are not “domestic products,” but are an indication of consumer engagement. Another factor was a drop in inventories from an elevated level in the fourth quarter.

External shocks to the economy — from lingering global effects of the COVID-19 pandemic to Russia’s invasion of Ukraine — are likely to cause further supply chain disruptions and contribute to inflation rising 5% this year.

“These disruptions will be consequential, and will cause price increases to be higher than we originally anticipated,” he said.

As a result, Schenk said he expects the Fed will continue to raise the federal funds rate this year. The rate, now at 1.00%, will rise to 1.85% to 2.00% by year’s end, and rise to 3.25% by late 2023.

Schenk described this year’s rate hikes as the Fed taking its foot off the economy’s accelerator, and next year’s increases as it pumps the brakes.

“In that situation, the idea of recession becomes a lot more obvious, and concerns increase more dramatically,” he said.

While many economists have said the Fed has a poor history of engineering a soft landing for the economy, Schenk said they have done so in the past, and as recently as the early 1990s, in the first years of President Bill Clinton’s first term. The annual inflation rate then had reached 4%, and the Fed responded by increasing the Fed Funds Rate from 2.66% in 1993 to 6% by early 1995. The Fed was able to lower inflation and cool the economy without tipping the nation into recession.

“The economy continued to hum along,” he said. “We continued to experience economic expansion for the next six to seven years” until the mild recession of 2001.

CUNA’s April 12 forecast showed credit union lending rising 8% this year and 7% next year, down from the 9% growth for both years in its January forecast.

“We expect the economy to continue to hum along. There’s a lot of pent-up demand in the marketplace. Even in the face of increasing interest rates, we are likely to see broad growth in spending,” Schenk said.

“Consumers will remain engaged and have an appetite for borrowing.”